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Alstom knows what it is like to miss the train. European regulators nixed the French high-speed rail maker’s planned tie-up with Germany’s Siemens on competition grounds. A year-and-a-half later competition authorities greenlighted its €5.5bn acquisition of Bombardier’s train unit. The deal has taken a toll on Alstom. Shareholders, warned that the cash burn was set to continue, marked shares down sharply on Tuesday.
Thanks to 2018 revenues of €15.7bn and a €71.1bn backlog, the merged company was catapulted to second largest in the world behind China’s CRRC. But creating a European rail champion was always going to burn cash. Alstom is reckoning on an end to the bleeding in the second half, after sustaining negative free cash flow of €1.6bn-€1.9bn in the first half of fiscal 2021/2022. Analysts pencil in a €250m outflow for the full year, according to S&P Global.
Cost savings of an annual €400m run rate are still on track, Alstom says. These include Bombardier now being able to tap markets at Alstom’s superior interest rates and procurement savings. But they also rely on spending cuts. Research and development costs are expected to double in absolute numbers — though as a percentage of sales they will fall from 3.7 per cent last year to 3 per cent in 2024/25. Capital spending will be held in check.
However, hopping aboard Alstom makes for a pricier ride than German peers Siemens and Sadler Rail, both of which trade on slightly lower multiples of forward ebitda. Hoped for efficiencies might explain that. Combined with the scaled up operation and other savings, Alstom targets adjusted ebit margins of 8-10 per cent. That effectively means the Canadian unit’s margins will rise to Alstom’s current levels in four years’ time.
Lockdowns stalled train operators around the world, forcing governments into bailouts. That has fed through to suppliers of rolling stock, which contributes just over half of Alstom’s sales. Alstom won its prize but its timing was awful. This is one train investors need not rush to catch.
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